UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 28, 1997
------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-1339
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OREGON METALLURGICAL CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0448167
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
530 34th Avenue S.W. 97321
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 967-9000
--------------
NONE
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(Former name or address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of November 10, 1997
----------------------------- -----------------------------------
Common stock, $1.00 par value 16,501,575
================================================================================
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
September 28, September 30, September 28, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net sales...................................... $ 75,051 $ 64,729 $ 214,419 $ 174,798
Cost of sales.................................. 54,046 48,490 157,003 133,930
------------- ------------- ------------ ------------
GROSS PROFIT .................................. 21,005 16,239 57,416 40,868
Selling, general and administrative
expenses..................................... 5,880 5,895 16,515 15,053
Research, technical and product
development expenses......................... 740 510 2,142 1,453
------------- ------------- ------------ ------------
INCOME FROM OPERATIONS......................... 14,385 9,834 38,759 24,362
Interest income................................ 1,027 180 2,620 180
Interest expense............................... (482) (477) (878) (1,812)
Minority interests............................. (218) (273) (713) (743)
------------- ------------- ------------ -------------
INCOME BEFORE INCOME TAXES..................... 14,712 9,264 39,788 21,987
Income tax expense............................. 5,309 2,819 15,142 7,011
------------- ------------- ------------ -------------
NET INCOME..................................... $ 9,403 $ 6,445 $ 24,646 $ 14,976
============= ============= ============ =============
Net income per share........................... $ 0.57 $ 0.48 $ 1.49 $ 1.24
============= ============= ============ =============
Weighted average common shares
and equivalents outstanding ................ 16,618 13,443 16,526 12,118
============= ============= ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
2
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
Unaudited
September 28, December 31,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 2,420 $ 1,460
Short-term investments available-for-sale..................................... 34,326 63,353
Accounts receivable, less allowance for doubtful
accounts of $768 and $494.................................................. 62,183 37,300
Inventories................................................................... 116,725 119,553
Other current assets.......................................................... 561 406
Deferred tax assets........................................................... 2,001 4,701
------------- ------------
Total current assets..................................................... 218,216 226,773
Property, plant and equipment, net.............................................. 52,008 34,890
Goodwill........................................................................ 17,011 732
Other assets, net............................................................... 768 650
------------- ------------
Total assets.............................................................. $ 288,003 $ 263,045
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................. $ 2,837 $ 3,785
Accounts payable ............................................................. 17,517 19,915
Accrued payroll and employee benefits......................................... 11,362 10,650
Accrued loss on long-term agreements.......................................... 418 2,710
Other liabilities............................................................. 5,946 9,231
------------ ------------
Total current liabilities................................................... 38,080 46,291
Long-term debt, less current portion............................................ 4,650 4,212
Deferred tax liabilities........................................................ 5,618 5,078
Accrued postretirement benefit.................................................. 1,693 1,621
Minority interests.............................................................. 2,701 1,990
------------ -----------
Total liabilities......................................................... 52,742 59,192
------------ -----------
Shareholders' equity:
Common stock, $1.00 par value;
80,000 shares authorized; shares issued:
1997, 16,445; 1996, 16,127.................................................. 16,445 16,127
Additional paid-in capital.................................................... 155,342 148,520
Retained earnings............................................................. 63,449 38,803
Cumulative foreign currency translation adjustment............................ 25 403
------------ -----------
Total shareholders' equity............................................... 235,261 203,853
------------ -----------
Total liabilities and shareholders' equity...................................... $ 288,003 $ 263,045
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Unaudited
Cumulative
Foreign
Additional Currency
Common Stock Paid-in Retained Translation
-------------------
Shares Amount Capital Earnings Adjustment Total
------ ---------- ---------- ---------- ----------- ------------
Balances, December 31, 1995 11,018 $ 11,018 $ 38,340 $ 16,545 $ (16) $ 65,887
Common stock offering,
net of related expenses 4,600 4,600 98,638 ---- ---- 103,238
Awards for stock compensation plans 429 429 9,671 ---- ---- 10,100
Exercise of stock purchase warrants 80 80 430 ---- ---- 510
Tax effect of issuance of common
stock for employee benefits ---- ---- 1,441 ---- ---- 1,441
Currency translation adjustment ---- ---- ---- ---- 419 419
Net income ---- ---- ---- 22,258 ---- 22,258
---------- ---------- ---------- ---------- ---------- ------------
Balance, December 31, 1996 16,127 16,127 148,520 38,803 403 203,853
Awards for stock compensation
plans 318 318 7,291 ---- ---- 7,609
Tax effect of issuance of common
stock for employee benefits ---- ---- (469) ---- ---- (469)
Currency translation adjustment ---- ---- ---- ---- (378) (378)
Net Income ---- ---- ---- 24,646 ---- 24,646
---------- ---------- ---------- ---------- ---------- ------------
Balances, September 28, 1997 16,445 $ 16,445 $ 155,342 $ 63,449 $ 25 $ 235,261
========== ========== ========== ========= ========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Nine Months Ended
---------------------------------
September 28, September 30,
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ $ 24,646 $ 14,976
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization.................................................. 4,021 3,562
Deferred income tax expense.................................................... 3,240 889
Employee benefits paid or payable in common stock.............................. 7,595 5,463
Provision for loss on long-term agreements..................................... (2,292) (855)
Minority interests............................................................. 713 743
------------- --------------
37,923 24,778
Changes in current assets and liabilities:
Accounts receivable.......................................................... (24,929) (11,169)
Inventories.................................................................. 2,828 (27,841)
Other current assets......................................................... (308) (21)
Accounts payable............................................................. (2,408) (1,049)
Accrued payroll and employee benefits........................................ 839 3,326
Other liabilities............................................................ (4,846) 5,133
Other ......................................................................... (34) ----
------------- --------------
Net cash provided by (used in) operating activities................................. 9,065 (6,843)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Short-term investments - matured.................................................. 31,573 ----
Short-term investments - purchased..................................... (2,546) (9,761)
Additions to property, plant and equipment........................................ (10,831) (2,403)
Acquisition of a business:
Fair value of assets acquired................................................. (9,958) ----
Purchase price of business in excess of net assets acquired................... (15,209) ----
Other............................................................................. 112 170
------------- --------------
Net cash used in investing activities............................................... (6,859) (11,994)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit agreement.......................................... 854 149,286
Payments on revolving credit agreement............................................ (1,840) (168,718)
Proceeds from long-term debt...................................................... ---- 177
Payments on long-term debt........................................................ (1,114) (99)
Book overdraft.................................................................... ---- 2,902
Net proceeds from stock offering.................................................. ---- 103,276
Proceeds from exercise of stock purchase warrant.................................. ---- 510
Special tax refund................................................................ 1,107 8,097
Special tax refund dividend....................................................... --- (6,557)
------------- --------------
Net cash provided by (used in) financing activities................................ (993) 88,874
-------------- --------------
Effect of exchange rates on cash and cash equivalents............................... (253) ---
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 960 70,037
CASH AND CASH EQUIVALENTS:
Beginning of period................................................................. 1,460 572
------------- --------------
End of period....................................................................... $ 2,420 $ 70,609
============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 COMPANY MERGER WITH ALLEGHENY TELEDYNE INCORPORATED
On October 31, 1997, the Company entered into a definitive merger agreement in
which Allegheny Teledyne will acquire the Company as a wholly-owned subsidiary.
Each outstanding share of the Company's common stock will be converted into
1.296 shares of Allegheny Teledyne common stock. Allegheny Teledyne is a
technology-based manufacturing company with a concentration in specialty metals.
The expected transaction provides the Company's shareholders with an approximate
11 percent ownership of the combined company, based on the closing prices of
outstanding common stock of the two companies on October 31, 1997. The merger
is expected to be tax free to the Company's shareholders, and will be accounted
for under the pooling of interests method.
NOTE 2 BASIS OF PRESENTATION
The interim consolidated financial statements have been prepared by Oregon
Metallurgical Corporation ("OREMET") and its subsidiaries (the "Company")
without audit. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's results
of operations and cash flow, for the three and nine month periods ended
September 28, 1997 and September 30, 1996; and its financial position as of
September 28,1997, and December 31, 1996. The balance sheet data as of December
31, 1996, was derived from audited financial statements, but does not include
all disclosures contained in the Company's 1996 Annual Report to Shareholders.
The interim consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto appearing in the
Company's Annual Report to Shareholders.
The results of operations of interim periods are not necessarily indicative of
the operating results of a full year or future years.
NOTE 3 ORGANIZATION AND OPERATIONS
The Company is one of two U.S. integrated producers and distributors of titanium
sponge, ingot, mill products and castings for use in the aerospace, industrial,
golf and military markets.
NOTE 4 BASIS OF CONSOLIDATION
Titanium Industries, Inc. ("TI") an eighty percent (80%) owned subsidiary
operates full-line titanium metal service centers in the United States, Canada,
United Kingdom and Germany and produces small diameter bar, weld wire and fine
wire. Rome Metals, Inc. ("Rome") was acquired by the Company on July 1, 1997
(See Note 10). The consolidated financial statements of the Company include the
accounts of TI, and the Company's wholly-owned subsidiaries, Rome and OREMET
France S.a.r.l. TI's accounts reflect the activities of its wholly-owned
subsidiaries, Titanium International, LTD., Titanium Wire Corporation and
Titanium International GmbH. All material intercompany accounts and transactions
have been eliminated in consolidation.
NOTE 5 CHANGE IN FISCAL YEAR
On April 24, 1997, OREMET's Board of Directors approved a change in OREMET's
fiscal year. Effective January 1, 1997, OREMET prospectively changed its
financial reporting year from a calendar year to a fiscal year consisting of 52
or 53 weeks ending on the Sunday closest to the end of the calendar year.
Consistent with the change in its fiscal year, OREMET has modified its quarterly
financial reporting from calendar quarters to fiscal quarters ending on the
Sunday closest to the end of the calendar quarter.
NOTE 6 RECLASSIFICATIONS
Certain amounts in the December 31, 1996, balance sheet have been reclassified
to conform to current period's presentation. The reclassifications do not affect
previously reported results of operations or cash flows.
NOTE 7 SHORT-TERM INVESTMENTS AVAILABLE-FOR-SALE
At September 28, 1997, all of the Company's short-term investments had
maturities of less than one year. The fair value of investments approximates
amortized cost.
6
NOTE 8 INVENTORIES
September 28, December 31,
1997 1996
------------- ------------
Finished goods....................................... $ 29,293 $ 33,739
Work-in-progress..................................... 37,725 34,897
Raw materials........................................ 49,707 50,917
------------ -------------
Total............................................. $ 116,725 $ 119,553
============ =============
NOTE 9 CONTINGENCIES
TUNGSTEN CONTAMINATION: In the fourth quarter of 1996, the Company discovered
that certain of its finished products contained tungsten particles. The tungsten
was introduced into the Company's manufacturing process through the use of
titanium recycle which contained tungsten welds. The Company has identified
products and customers who have been affected by this matter, and believes that
substantially all of the material in question will meet required specifications
for its intended end use. Some of the material has been converted into fastener
stock and fasteners for the commercial aerospace industry. Pursuant to studies
performed by the Company and others, some commercial aerospace manufacturers and
the U.S. Federal Aviation Administration have approved the fasteners for use.
The Company established a reserve of $750 in the fourth quarter of 1996 to cover
customer claims and internal costs. Minimal costs have been incurred by the
Company as of September 28, 1997, relating to this matter. The Company continues
to believe that established reserves will be adequate to cover claims associated
with this matter.
ENVIRONMENTAL MATTERS: The Company is subject to Federal, state, and local
statutes and regulations concerning environmental matters and land use. Note 13
to the Company's 1996 Annual Report to Shareholders contains information
regarding the Company's environmental matters.
NOTE 10 ACQUISITION OF ROME METALS, INC.
On July 1, 1997, the Company acquired substantially all of the assets and
business of Rome Metals, Inc. ("Rome"), a privately owned corporation. Rome,
with operations in Western Pennsylvania, is a leading provider of finishing
services to the titanium, zirconium and specialty metals flat products
industries.
The acquisition of Rome was accounted for as a purchase, and accordingly, Rome's
results are included in the consolidated financial statements since the date of
acquisition. The purchase price, which was financed through available short-term
investments and issuance of a promissory note, has been allocated to the assets
of the Company, based upon their respective fair market values. The excess of
the purchase price over the fair value of assets acquired (goodwill) is being
amortized over fifteen years.
Pro forma consolidated results are not presented for the Rome acquisition, as it
is not material to the consolidated results of operations.
NOTE 11 NEW ACCOUNTING PRONOUNCEMENT
CHANGES IN ACCOUNTING PRINCIPLES: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 128,
Earnings Per Share ("FAS 128"). FAS 128 specifies the computation, presentation,
and disclosure requirements for earnings per share. FAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Earlier application of FAS 128 is not permitted. The
effect of implementing FAS 128 on the Company's earnings per share computations
is not expected to be significant.
7
PART 1: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S 1996
ANNUAL REPORT ON FORM 10-K AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO OF THE COMPANY. THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND
EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, DEPENDENCE ON AND CYCLICALITY OF AEROSPACE INDUSTRY, UNCERTAINTY OF
EMERGING GOLF MARKET, HIGHLY COMPETITIVE INDUSTRY, SUBSTANTIAL EXCESS PRODUCTION
CAPACITY, PLANNED SIGNIFICANT INVESTMENT IN ELECTRON BEAM FURNACE, DEPENDENCE ON
ESSENTIAL MACHINERY AND EQUIPMENT, DEPENDENCE ON RAW MATERIALS AND SERVICES,
ENVIRONMENTAL REGULATION, LABOR AGREEMENTS, AND CONTINGENCIES DESCRIBED IN THE
COMPANY'S FINANCIAL STATEMENTS.
MERGER AGREEMENT
On October 31, 1997, Oregon Metallurgical Corporation ("OREMET" or "the
Company") and Allegheny Teledyne Incorporated ("Allegheny") announced that the
two companies had entered into a definitive merger agreement. The merger is
subject to the approval of OREMET's shareholders and federal regulations. The
merger plan anticipates that Allegheny will acquire OREMET as a wholly-owned
subsidary and each outstanding share of OREMET common stock will be converted
into 1.296 shares of Allegheny common stock. Allegheny is a technology-based
manufacturing company, with a concentration in specialty metals.
The merger will provide OREMET shareholders with an approximate 11% ownership
interest in the combined company.
OVERVIEW
Demand for the Company's products remained strong during the third quarter of
1997. The strength of the commercial aerospace industry was the dominant factor
behind the Company's third quarter results. The average price per pound for
ingot and mill products (the Company's two largest product lines) continued to
increase during the quarter. Gross profit margins increased to 28% for the third
quarter of 1997 compared to 27% for the second quarter.
The U.S. Geological Survey (USGS) reported that U.S. industry shipments of
titanium mill products were approximately 29 million pounds for the first half
of 1997. The USGS reported domestic mill product shipments of 57 million pounds
in 1996 and 44 million pounds in 1995. The Company expects domestic shipments of
mill products for the full year will be comparable to or slightly higher than
those in 1996. The Company further expects that increased demand from the
commercial aerospace market, coupled with increases in demand from other markets
sectors, will result in record domestic mill product shipments for the industry
in 1998.
Commercial aerospace related sales represented approximately 63% of the
Company's sales for the first nine months of 1997, compared to approximately 43%
for the same period of 1996. The commercial aerospace industry is expected to
remain the largest source of demand for titanium products for the foreseeable
future. International and export sales approximated $43 million, or 20% of
sales, for the first nine months of 1997. International and export sales are
principally to markets in Europe and Asia.
Third quarter sales to the golf club industry totaled $0.5 million, compared to
$11.3 million, or 18% of sales in the third quarter of 1996. The reduction in
sales is due to a combination of inventory accumulation by the golf clubhead
producers, their increased efficiency in recycling internal scrap and
competition from titanium producers located in the Former Soviet Union. The
Company's net sales to golf clubhead producers approximated $40 million in 1996.
The Company believes its sales to this industry will be less than $10 million in
1997. Consumer demand for titanium golf clubs remains strong.
The Company continues to offset golf club orders with orders from commercial
aerospace customers and other markets. Titanium products destined for the
commercial aerospace market typically require longer lead times than products
for non-aerospace applications. The Company estimates that the strong demand
from the commercial aerospace market, together with the corrosion protection and
military markets, will offset the decline in industry shipments to the golf
clubhead market in 1997.
8
The military continues to explore using titanium for armor applications. The
Company has developed alloy plate and billet products that have excellent
ballistic characteristics, and these products have been selected for programs in
the U.S. and Europe. Market development for armor applications is a high
priority as the Company believes that titanium usage on tanks and various types
of personnel carriers will increase.
The Company's twelve-month sales order backlog was $150 million at September 28,
1997, compared to $128 million and $160 million at June 29, 1997, and September
30, 1996, respectively. The Company's backlog is based on firm purchase orders
with a scheduled delivery date. Customer orders may be subject to cancellation
by the customer upon payment of specified charges.
The Company acquired the assets of Rome Metals, Inc., on July 1, 1997. See Note
10 to the Financial Statements. The Company paid a portion of the purchase price
in cash, and financed the balance of the purchase with a five-year mortgage.
RESULTS OF OPERATIONS
The following table sets forth certain operating items of the Company's
consolidated results of operations as a percentage of net sales for each of the
years in the five-year period ended December 31, 1996, and for the three months
ended September 28, 1997 and September 30, 1996.
Three Months Ended Year Ended
----------------------
Sept. 28, Sept. 30, December 31,
--------- --------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited)
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit (loss)............ 28.0 25.1 24.4 10.8 9.3 4.9 (1.0)
Income (loss) from
operations (1).............. 19.2 15.2 14.8 (0.2) (3.5) (11.2) (10.4)
Net income (loss).............. 12.5 10.0 9.4 (1.6) (2.8) (7.4) (7.4)
<FN>
(1) A provision for a loss on long-term agreements ("LTA's") of $5.7 million
was recorded in 1995. Gross profit and income from operations, exclusive
of this provision, as a percentage of net sales would have been 13.8% and
2.8% in 1995, respectively.
</FN>
QUARTERLY RESULTS OF OPERATIONS
- -------------------------------
The following table presents the Company's unaudited consolidated quarterly
financial data for fiscal year 1996, and the first, second and third quarters of
1997. Although the Company's business is not seasonal, growth rates of sales
have varied from quarter to quarter as a result of the timing of new products,
industry cyclicality and general U.S. and international economic conditions.
(In millions)
1997 Quarters 1996 Quarters
--------------------------------- ---------------------------------------------
Third Second First Fourth Third Second First
----- ------ ----- ------ ----- ------ -----
Net sales $ 75.1 $ 67.3 $ 72.0 $ 62.1 $ 64.7 $ 58.8 $ 51.3
Gross profit 21.0 18.0 18.4 16.9 16.2 14.2 10.4
Income from operations 14.4 11.6 12.7 10.7 9.8 9.0 5.5
Net income 9.4 7.5 7.7 7.3 6.4 5.2 3.3
9
COMPARISON OF THIRD QUARTER 1997 TO THIRD QUARTER 1996
- ------------------------------------------------------
NET SALES. Net sales increased by $10.3 million, or 16% to $75.1 million in the
third quarter of 1997, compared to $64.7 million in 1996. The increase in sales
was primarily driven by increased demand and higher prices for both the
Company's manufactured and service center products. Of the $10.3 million sales
increase, $2.5 million was the result of volume increases and $7.8 million from
higher average selling prices.
TITANIUM SPONGE. During the third quarter of 1997, the Company's integrated
sponge facility operated at near capacity, primarily supplying the Company's
internal demand for titanium sponge as well as sales to RMI Titanium Company
("RMI") under a long-term titanium sponge conversion agreement. Sales of
titanium sponge and sponge conversion services of $4.0 million, remained
substantially constant between the two quarters. Sponge shipments decreased 5%
and the average sponge price per pound increased 6%. The Company expects to
continue to operate its sponge facility at near capacity with substantially all
production being utilized for internal consumption or for supply to RMI
(approximately 45% of capacity in 1996). The Company is presently supplementing
its sponge production with purchases from foreign producers, and is not
marketing its internally produced sponge.
INGOT. Sales of ingot increased 77% to $20.1 million for the third quarter of
1997 compared to $11.4 million for the third quarter of 1996. Ingot shipments
increased 24% and the average ingot price per pound increased 42%. The Company
operated its melt facilities at near capacity during the third quarter of 1997
and expects to continue to do so for the remainder of the year. The Company
produces ingot for both internal use in its mill products division and for sale
primarily to aerospace customers.
MILL PRODUCTS. The Company produces or contracts for outside production a
variety of mill products including: billet, bar, plate, sheet and engineered
parts. Mill product sales decreased 8% to $25.0 million for the third quarter of
1997 compared to $27.3 million for the third quarter of 1996. Shipments of mill
products decreased 29%, and the average price per pound increased 26%. Sales to
producers of golf clubheads decreased during the third quarter of 1997 compared
to the same period of 1996. Sales to producers of aerospace components are
responsible for a substantial portion of mill product sales.
The decrease in shipments to golf clubhead producers accounted for the majority
of the decrease in mill product sales. The Company continues to replace golf
orders with new orders from commercial aerospace customers and other markets.
DISTRIBUTION AND SERVICE. The Company's sales and service centers market a wide
variety of mill products including engineered parts that are manufactured by
various producers. Distribution and service sales for the third quarter of 1997
include the sales of Rome Metals, Inc., acquired by the Company on July 1, 1997.
During the third quarter of 1997, distribution and service sales increased 15%
to $20.7 million, compared to $18.0 million for the third quarter of 1996,
primarily due to the Rome acquisition. Sales to the industrial markets have
moderated, while the demand for commercial aerospace products has increased. Due
to high demand, the Company's service centers have had difficulty obtaining
certain commercial aerospace products from vendors.
CASTINGS. Sales of castings increased 38% to $3.6 million for the third
quarter of 1997 compared to $2.6 million for the third quarter of 1996. The
Company is expanding its casting facilities.
COST OF SALES AND GROSS PROFIT. Cost of sales for the third quarter of 1997
increased 11% to $54.0 million, compared to $48.5 million in the third quarter
of 1996. The primary reasons for the increase in cost of sales were increased
shipments, higher material costs for the distribution business, and a shift in
mix to more costly aerospace products. The Company's gross profit margin
increased to 28% for the third quarter of 1997 from 25% for the third quarter of
1996, primarily as a result of higher prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A of $5.9 million
remained substantially constant between the two quarters. As a percentage of
sales, SG&A decreased to 7.8% from 9.1% in the third quarter of 1996.
Fluctuations in the market price of the Company's common stock affect the amount
of expenses incurred under the Company's Stock Appreciation Rights ("SAR's")
Plan.
10
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES ("RT&D"). RT&D expenses
increased $.2 million during the third quarter of 1997 to $.7 million compared
to the third quarter of 1996. The increase relates to the ongoing development of
improved manufacturing processes and product development. The main focus of RT&D
is to develop enhanced production procedures, provide customers with required
technical support and develop new products and markets. RT&D works jointly on
projects with customers, research agencies and universities.
INTEREST INCOME. Net proceeds from the Offering (See Offering under Liquidity
and Capital Resources) have been invested in short-term marketable securities,
which is the primary factor giving rise to the increase in interest income.
INTEREST EXPENSE. Interest expense remained substantially unchanged between the
two quarters.
PROVISION FOR INCOME TAXES. The Company reported a provision for income taxes of
$5.3 million, or an effective tax rate of 36% (on income before income taxes and
minority interests) for the third quarter of 1997 compared to $2.8 million, or
an effective tax rate of 30% for the comparable period in 1996. The difference
between the federal and state combined statutory tax rate of 40% and the 1997
effective tax rate of 36% was due to the Company's ability to utilize tax
credits which had been subject to a valuation allowance. The difference between
the federal and state combined statutory tax rate and the effective tax rate of
30% for the third quarter of 1996 is primarily due to a change in the Company's
deferred tax asset valuation allowances.
NET INCOME. The Company reported net income of $9.4 million, $0.57 per share,
for the third quarter of 1997 compared to net income of $6.4 million, $0.48 per
share, for the comparable period in 1996.
COMPARISON OF FIRST NINE MONTHS OF 1997 TO FIRST NINE MONTHS OF 1996
- --------------------------------------------------------------------
NET SALES. Net sales increased $39.6 million, or 23% to $214.4 million in the
first nine months of 1997, compared to $174.8 million in 1996. The increase in
sales was primarily driven by higher prices and increased demand for both the
Company's manufactured and service center products. Of the $39.6 million sales
increase, $12.1 million was the result of volume increases and $27.5 million
from higher average selling prices.
TITANIUM SPONGE. During the first nine months of 1997, the Company's integrated
sponge facility operated at near capacity, primarily supplying the Company's
internal demand for titanium sponge as well as sales to RMI under a long-term
titanium sponge conversion agreement. Sales of titanium sponge and sponge
conversion services of $11.5 million remained substantially constant between the
two periods. Sponge shipments increased 9% and the average sponge price per
pound decreased 11%. The decrease in the average price per pound is related to a
decrease in sales of high purity sponge to the electronics industry. The Company
projects that it will continue to operate its sponge facility at near capacity
with substantially all production being utilized for internal consumption or for
supply to RMI.
INGOT. Sales of ingot increased 87% to $61.8 million for the first nine months
of 1997 compared to $33.1 million for the first nine months of 1996. Ingot
shipments increased 26% and the average ingot price per pound increased 48%. The
Company operated its melt facilities at near capacity during the first nine
months of 1997 and expects to continue to do so for the remainder of 1997. The
Company produces ingot for both internal use in its mill products division and
for sale primarily to aerospace customers.
MILL PRODUCTS. The Company produces or contracts for outside production a
variety of mill products including, billet, bar, plate, sheet and engineered
parts. Mill product sales increased 5% to $68.7 million for the first nine
months of 1997 compared to $65.7 million for the first nine months of 1996.
Shipments of mill products decreased 19% and the average price per pound
increased 27%. Sales to producers of golf clubheads decreased during the first
nine months of 1997 compared to the same period of 1996. Sales to producers of
aerospace components are responsible for a substantial portion of the growth in
mill product sales.
11
DISTRIBUTION AND SERVICE. The Company's service centers market a wide variety of
mill products including engineered parts that are manufactured by various
producers. Distribution and service sales include the sales of Rome Metals,
Inc., which was acquired by the Company on July 1, 1997. During the first nine
months of 1997, sales of distribution and service center products increased 9%
to $57.7 million compared to $52.7 million for the first nine months of 1996.
The increase in sales was primarily due to the Rome acquisition, increased
product shipments, and favorable pricing and product mix.
CASTINGS. Sales of castings increased 26% to $9.2 million for the first nine
months of 1997 compared to $7.3 million for the first nine months of 1996. The
Company is operating at a higher production rate in 1997 and is expanding its
casting facilities.
COST OF SALES AND GROSS PROFIT. Cost of sales for the first nine months of 1997
increased 17% to $157.0 million, compared to $133.9 million in the first nine
months of 1996. The primary reasons for the increase in cost of sales were
increased shipments and higher material costs. The Company's gross profit margin
increased to 26.8% for the first nine months of 1997 from 23.4% for the first
nine months of 1996, as a result of higher prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $1.5 million, or
10%, for the first nine months of 1997 to $16.5 million from $15.1 million in
the comparable nine-month period of 1996. The increase is primarily a result of
additional employees hired to support the increase in operating activity. As a
percentage of sales, SG&A decreased to 7.7% in the first nine months of 1997
from 8.6% in the first nine months of 1996.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES. RT&D increased by $0.7
million for the first nine months of 1997 to $2.1 million from the comparable
nine month period of 1996. The increase relates to the development of improved
manufacturing processes and alloy development. The main focus of RT&D is to
develop enhanced production procedures, provide customers with required
technical support and develop new products and markets. RT&D works jointly on
projects with customers, research agencies and universities.
INTEREST INCOME. Net proceeds from the Offering have been invested in short-term
marketable securities, which is the primary factor giving rise to the increase
in Interest Income.
INTEREST EXPENSE. Interest expense decreased $0.9 million to $0.9 million in the
first nine months of 1997 compared to the first nine months of 1996, resulting
from a decrease in borrowings. In August 1996, the Company paid down its U.S.
revolving credit agreement with funds received from the Offering.
PROVISION FOR INCOME TAXES. The Company reported a provision for income taxes of
$15.1 million, or an effective tax rate of 37% (on income before income taxes
and minority interests) for the first nine months of 1997 compared to $7.0
million, or an effective tax rate of 31% for the comparable period in 1996. The
difference between the federal and state combined statutory tax rate of 40% and
the effective tax rate of 37% for the first nine months of 1997 is related to
favorable amendments of the Company's prior year's tax returns and utilization
of the tax credits which had been subject to a valuation allowance. The
difference between the federal and state combined statutory tax rate and the
effective tax rate of 31% for the first nine months of 1996 is primarily due to
a change in the Company's deferred tax asset valuation allowance.
NET INCOME. The Company reported net income of $24.6 million, $1.49 per share,
for the first nine months of 1997 compared to net income of $15.0 million, $1.24
per share, for the comparable period in 1996.
12
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
- --------
Net cash provided by operating activities totaled $9.1 million for the first
nine months of 1997, compared to net cash used in operating activities of $6.8
million for the comparable period of 1996. For the first nine months of 1997,
the Company reported net income of $24.6 million, compared to $15.0 million for
the comparable period of 1996. During the first nine months of 1997 and 1996,
the Company incurred $7.6 million and $5.5 million, respectively, in non-cash
expenses relating to its Stock Compensation and Savings Plans. Increases in the
average market value of the Company's common stock and in the number of eligible
employees are the primary factors for the 1997 increase. Net cash invested in
working capital during the first nine months of 1997 was $3 million less than in
the same period of 1996.
Net cash used in investing activities totaled $6.9 million for the first nine
months of 1997 compared to net cash used in investing activities of $12.0
million for the comparable period of 1996. During the first nine months of 1997,
the Company utilized $31.6 million in short-term investments primarily to fund
working capital requirements, capital additions, and the acquisition of Rome.
The Company's additions to property, plant and equipment totaled $10.8 million
and $2.4 million in the first nine months of 1997 and 1996, respectively.
Net cash used in financing activities totaled $1.0 million for the first nine
months of 1997, compared to net cash provided by financing activities of $88.9
million for the comparable period of 1996. During the third quarter of 1996, the
Company completed the Offering with net proceeds of $103.3 million, and paid
down its U.S. revolving credit agreement.
REVIEW OF SIGNIFICANT WORKING CAPITAL ACCOUNTS.
- -----------------------------------------------
SHORT-TERM INVESTMENTS. Proceeds from the Offering have been invested in a
portfolio of highly-liquid debt securities. The Company reported $34.3 million
in short-term investments as of September 28, 1997, compared to $63.4 million as
of September 30, 1996. Short-term Investments have been utilized by the Company
to fund additions to property plant, and equipment, in addition to the purchase
of Rome.
INVENTORIES. Inventories decreased by $2.8 million, or 2% during the first nine
months of 1997, to $116.7 million; while they increased $27.8 million, or 42%,
to $93.9 million during the comparable period of 1996. During 1996, the Company
increased its level of inventories in response to a growing sales backlog and
increased production levels. While sales increased during the first nine months
of 1997, inventory levels remained relatively unchanged. The Company's
manufacturing facilities are presently operating at near capacity.
ACCOUNTS RECEIVABLE. Accounts receivable increased by $24.9 million, or 67%,
during the third quarter of 1997 to $62.2 million, while receivables increased
by $11.2 million, or 43% to $37.1 million during the comparable period of 1996.
The increase in accounts receivable is primarily the result of an increase in
sales volume.
ACCOUNTS PAYABLE. Accounts payable decreased $2.4 million, or 12%, during the
first nine months of 1997 to $17.5 million. The decrease in accounts payable
during the first nine months of 1997 reflects a decrease in the level of raw
material purchases. Accounts payable at September 30, 1996, was $15.9 million, a
decrease of $1.0 million compared to the balance at December 31, 1995.
ACCRUED PAYROLL AND EMPLOYEE BENEFITS. Accrued payroll and employee benefits
increased by $0.7 million, or 7% during the third quarter of 1997 to $11.4
million, while they increased by $3.9 million, or 58% to $10.5 million during
the comparable period of 1996. Accruals related to the Company's Stock
Compensation and Savings Plans accounted for a substantial portion of the
increase.
OFFERING
- --------
On August 26, 1996, the Company completed an Offering ("Offering") of 4.6
million shares of its common stock for a price of $23.75 per share. Proceeds
from the Offering, net of underwriting fees and expenses, totaled $103 million.
The Company has used approximately $18 million of the proceeds to pay down its
U.S. revolving credit agreement. The balance of the proceeds are being used to
construct a new electron beam furnace ("EB furnace"), expand the Company's
distribution business, and for working capital and other general corporate
purposes.
13
CREDIT AGREEMENTS.
- ------------------
The Company entered into a $60 million unsecured U.S. borrowing agreement with
various lenders during the third quarter of 1997. The credit agreement provides
for interest at the lead lender's rate or LIBOR rate plus 0.5%, expires in
August 2000, and contains various restrictive covenants, including a minimum
tangible net worth, current asset coverage ratio, and interest coverage ratio.
As of September 28, 1997, there was no balance outstanding under the agreement.
Titanium International Limited, a subsidiary of TI, has a short-term credit
facility in the U.K., permitting borrowings of approximately $3.5 million. The
U.K. credit agreement is subject to renewal in May 1998. The balance outstanding
under the U.K. credit agreement as of September 28, 1997 was $1.4 million.
CAPITAL EXPENDITURES.
- ---------------------
The Company intends to use approximately $42.0 million of the net proceeds from
the Offering for the construction, start-up, and product qualification costs for
a new EB furnace and related raw material processing facilities. The
construction and production ramp-up periods are expected to take approximately
18 months. Approximately $9.0 million will be expended in 1997 (design,
procurement and construction phases), and approximately $33.0 million in 1998
(construction and testing phases).
The Company also intends to expand existing service centers and distribution
business.
The Company anticipates that capital expenditures during 1997 will approximate
$20 million, which will be provided by both presently available and internally
generated funds or credit facilities. Capital expenditures required to maintain
compliance with applicable environmental regulations are included in the
Company's capital expenditure plan to the extent that they can be determined.
Except for approximately $25 million relating to the construction of the EB
furnace, the Company has no material open commitments that obligate it to make
future capital expenditures.
INCOME TAXES.
- -------------
The Company anticipates that in 1997 it will fully utilize its federal
alternative minimum tax (AMT) credit carryforwards and its remaining State of
Oregon net operating loss carryforwards of $10.5 million. In addition to federal
and State of Oregon income taxes, the Company pays income and franchise taxes in
various foreign jurisdictions and states. The Company amended certain of its
prior years federal tax returns, reducing its second quarter 1997 provision for
income taxes by $0.4 million, and recognized $0.5 million of tax credits in the
third quarter of 1997.
ADEQUACY OF LIQUIDITY AND CAPITAL RESOURCES.
- --------------------------------------------
The Company's access to borrowing facilities, public markets, and internally
generated cash are expected to be sufficient to support the Company's operating
needs and to finance its continued growth, acquisitions, capital expenditures
and repayment of long-term debt obligations.
NON-U.S. OPERATIONS AND MONETARY ASSETS.
- ----------------------------------------
Approximately 6% of the Company's net sales for 1997 were derived from its
service centers in the U.K., Germany, Canada and France. Changes in the value
of non-U.S. currencies relative to the U.S. dollar cause fluctuations in U.S.
dollar financial position and operating results. The impact of currency
fluctuations on the Company was not significant in the first nine months of
1997.
14
PART 2: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A. Exhibits
10.1 Credit Agreement Dated as of August 26, 1997, between
Oregon Metallurgical Corporation as Borrower, certain
financial institutions, and Bank of America National
Trust and Savings Association as the Agent.
11.1 Earning Per Share Computation
27.1 Financial Data Schedule
B. Forms 8-K No reports on Form 8-K were filed by the Company during
the quarter ended September 28, 1997.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OREGON METALLURGICAL CORPORATION
Registrant
Date: November 13, 1997 /s/ Dennis P. Kelly
---------------------------------
Dennis P. Kelly
Vice President, Finance and
Chief Financial Officer
Signing on behalf of the Registrant and as
Chief Accounting Officer
15